Every year before the announcement of annual federal budget [which is nothing but an official ritual as it brings no positive change in the life of a common man] a plethora of tax proposals are received by the Federal Board of Revenue (FBR) from trade and professional bodies, tax bars and industry's representatives. This year the FBR issued guidelines on March 8, 2012 to the business community requesting that no concession or exemption should be sought.
The very next day there was the news that the FBR conceded to give amnesty to investors in stock exchanges provided they keep shares for 20 days. This was not only a self-contradictory stance but a shameful act. Taxation should serve as a catalyst for industrial expansion and economic growth. In Pakistan the ill-directed, illogical, regressive and unfair tax regulations are causing a dampening effect on industrial and business growth.
The sole stress on meeting revenue targets, without evaluating its impact on the economy, has crippled our trade and industry during the last few years, especially since we have started submitting completely before the dictates of foreign donors. Had the successive governments concentrated on economic growth and industrial expansion, there would have been consequential substantial rise in taxes today. It is impossible to enhance revenues with stagnation in the economy, and over-taxing such an economy, as has been done in Pakistan, can destroy the revenue system as well.
The priority of our rulers, military and civil alike, on achieving revenue targets, fixed ambitiously every year in utter disregard of how the economy will behave, is the main problem. Fixing revenue targets in isolation and without making necessary efforts to improve productivity and economic growth, has forced Pakistan into a dilemma, where neither it can afford to give any tax relief package to the trade and industry [due to growing fiscal deficit] nor can it achieve a satisfactory level of economic growth [due to retrogressive tax measures]. This is a vicious circle in which our policymakers are now trapped. They will have to find ways and means to come out of this tangle to make Pakistan a competitive place where investors find satisfactory conditions to live and invest. In a country where there is no security of life or property, notwithstanding the availability of a host of tax benefits and other incentives, investors will never come forward.
The FBR, apex administrative revenue authority, has been single-handedly destroying Pakistan's trade and industry by withholding undisputed refunds payable to the taxpayers, making excessive tax demands and resorting to all kinds of negative tactics and highhandedness to meet its budgetary targets. The actions of the tax machinery are detrimental for business and industry and resultantly, FBR not only has failed to tap the real revenue potential (which is not less Rs 5 trillion) but could not meet the revised targets for the last many years. Besides, there is perpetual deterioration in our fiscal and budget deficits.
There cannot be two opinions about the complete shifting of our economic priorities. We as a nation must concentrate on increasing our productivity, efficiency and economic growth, which alone can ensure more revenues for the State. The main cause of our pathetic economic situation is the existence of inefficient, corrupt, repressive and criminal governments/institutions, which do not give a damn for the welfare of the common people. The successive governments' onerous tax and regulatory policies on the dictates of the foreign masters have pushed millions of people below the poverty line. We will have to move quickly and decisively to reverse this trend by restoring Pakistan's undeniable geo-strategic and business competitive position in the region. There is an urgent need to take necessary and tough decisions to make Pakistan a respectable place to live, work and invest.
We are, therefore, not proposing cosmetic changes in the Income Tax Ordinance 2001, Sales Tax Act 1990, Federal Excise Act, 2005 or the Customs Act, 1969 [this will be taken care of by trade and professional bodies in the form of annual budget proposals submitted to the FBR]. This article suggests some key areas where paradigm shifts are needed in structural and operation level to ensure not only more tax revenue for the State but also social equity and fairness so that honest taxpayers are not disillusioned by the benefits FBR has been extending to their dishonest friends in trade, business and industry.
Provisions for countering tax evasion It is a curious paradox of our situation that while money for worthwhile industrial and business growth and public benefits is scare, there is colossal unaccounted cash supply circulating in the economy in search of further undercover gains. What is more tragic is that this social evil inherent in the tax system gets doubly compounded as it necessitates greater and greater tax burdens on those who are law-abiding. The most crucial problem faced by us in fiscal reform programme is that of devising astute and stringent measures to curb tax evasion so that we can distribute the burden of taxes fairly and justly between different persons in the same or similar walks of life. The honest taxpayers have to be safeguarded as day by day they are being disillusioned by the fact that tax evaders are not paying anything with the connivance of their friends and mentors in the tax machinery. The unholy alliance between the tax evaders and corrupt tax officials has to be eliminated as a first and the foremost step if we want to initiate any meaningful change in the tax system.
The Government must announce Compulsory Public Disclosure of Asset Schemes requiring the following to make their assets and liabilities public:
-- High-ranking civil and military officials
-- All the Senators, MNAs and MPAs
-- Judges of the superior courts
-- Businessmen/Directors of all the companies who availed loans exceeding Rs 5 million from any financial institution
-- Professionals like lawyers, doctors, chartered accountants, engineers, journalists, consultants etc
The above privileged classes of society shall act as an example for others. Their declarations will inspire the common people to pay their taxes honestly. The State needs to wage an all-out war against the burgeoning black economy, money power and corrupt politico-administrative structures. This war must start from the mighty classes as suggested above. The people of Pakistan have a right to know how these mighty sections of society amassed immense wealth without paying taxes.
Positive change in tax policy
There is a national consensus that existing tax policy needs to be reformulated to provide an equitable, pragmatic, investment-oriented and business-friendly tax system, integrating good tax administration with simplified tax laws that are easily be understood and hassle-free from implementation perspectives. The efforts of the government in the past to reform the tax system through special task forces, recruitment of new members on market wages and relying on the reports of so-called foreign experts had not yielded any positive results or acceptability from the taxpayers. It has remained a closed door, bureaucratic exercise with no meaningful dialogue with the people and experts who matter in the subject. In the absence of a well-designed tax policy, the agenda of tax reform will remain lopsided. The government should not make any legislative and administrative changes till the time a transparent tax policy is announced and the support of all those who are affected by it is secured.
Over a period of time our tax system has become rotten, oppressive, unjust and target-oriented. There is a dire need to discuss the philosophical framework and principles that should be the main concern of our tax policy and not mere achieving of targets set out unreasonably by foreign donors. Our potential is much higher than these targets, which can never be achieved with the present tax laws and incompetent, inefficient and corrupt tax machinery.
Our tax potential is not less than Rs 5000-6000 billion provided that the tax base is made wider and equitable, the tax machinery is completely overhauled and exemptions and concessions available to the privileged sections of society are withdrawn.
Equity principle If a given amount of revenue is needed to finance public services, then each taxpayer should contribute in line with his ability-to-pay taxes. Those who possess more economic power (income and wealth) should contribute more to the public exchequer and vice versa. The duty to pay taxes is seen as a collective responsibility rather than a personal one. The ability-to-pay principle views tax policy issues in isolation to the incidence of public expenditure. Many regard this principle as the most equitable and just method of taxation. It is emphasised primarily for its redistributive role. We in Pakistan have completely deviated from this principle, which is a constitutional obligation of the government.
The existing tax system is highly exploitative and unjust. It protects the rich and exploitative elements that have monopoly over economic resources. There is no political will to tax the privileged classes. The common man is paying an exorbitant sales tax of 16% (on many finished imported items the impact is as high as 25% after adding all other duties, taxes etc) on essential commodities like medicines, but the mighty sections of society such as big industrialists, landed classes, generals and bureaucrats are paying no wealth tax/income tax on their colossal assets/incomes.
The determination of a tax base capable of measuring an individual's ability-to-pay is a major problem of our tax system. This rule is incorporated in the form of progressive rate schedule for personal income tax, estate duty, and property tax worldwide. In Pakistan we have moved from this policy to unequal sacrifice rule where the mighty civil and military bureaucrats (now they are part of the landed aristocracy by getting State lands as awards and rewards), rich industrialists and greedy businessmen are paying meagre personal taxes and the poor people are compelled to pay sales tax of 16% and subjected to hardships due to ever-rising costs of public utilities and POL products. This is in direct violation of Article 3 of the Constitution of the Islamic Republic. It is the duty of the government to immediately remove these dichotomies and distortions. The taxes should be for the welfare and benefit of the public at large and to make the State invincible, and not for the luxuries of the rulers and State functionaries.
Benefit principle According to this principle, an equitable tax system is one under which tax payments are based on the amount of benefits received from government services. In other words, the cost of government services should be apportioned among individuals according to the relative benefits they enjoy. Clearly, implementation of the benefit principle presupposes determination of the incidence of public expenditure before deciding distribution of the tax burden. Thus it encompasses issues of both tax and expenditure policies.
Our successive governments have failed to convince the people that payment of taxes is their collective responsibility. All the civil and military governments alike were engaged in wasteful expenditure, never bothered to live within their means and failed to even protect the life and property of the people, not to talk of providing them basic needs of health, education and civic amenities. Are they justified to ask people to make sacrifices when the lifestyle of the rulers is Shahana (Emperor like)?
The tax policy should be used as a tool of distributive justice. The Government should launch programmes, financed mainly through taxes, to solve the twin problems of unemployment and poverty. These welfare-oriented schemes may also include subsidised/free medical and educational facilities, low-cost housing, and drinking water facilities in rural areas, land improvement schemes, and employment guarantee programmes. Once people see the tangible benefits of the taxes paid, there will be a better response to tax compliance. Taxes cannot be collected through harsh measures and irrational policies. The rulers and tax bureaucrats have to demonstrate by their actions a clear inspirational model for the taxpayers to believe them and to pay taxes honestly and diligently.
Taxpayers' bill of rights
-- The Government, before imposing any new obligations on the taxpayers at the instance of IMF, must restore the confidence of the taxpayers by immediately promulgating a Taxpayers' Bill of Rights, as was done by a number of countries including USA and UK in 1980s.
-- The provisions of the Bill must: -
(a) Safeguard and strengthen the rights of taxpayers.
(b) Ensure equality of treatment
(c) Guarantee the privacy and confidentiality of their declarations
(d) Provide right to assistance by State in tax matters
(e) Guarantee unfettered right of appeal through an independent appellate system and an alternate fast-track administrative dispute resolution system.
(To be continued)